Why do we need a contract... don't you trust me?

This article talks about why you would want to use a contract, the benefits of using one as well as the right way to do it. It also tells you why a written contract is often preferable to just a verbal agreement.

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Most people think of a contract as being a written document, whereas an agreement is more likely to be considered oral. In law, there is no difference. The word "contract" is an absolute alternative to the term "agreement".

An oral contract is just as enforceable as a written one. The problem is in proving the terms. If your agreement is oral, you need at least one witness and preferably more than one, who can confirm your version of events or details of terms. On the other hand a piece of paper, or nowadays, a computer file, suitably signed and dated, cannot easily be denied.

If you look around you in daily life, the people you trust most tend to record what they say, and those you trust least do not. You may be irritated by the habit and waste of money involved when your solicitor insists on writing letters, but compare your reaction to that you have of someone who uses the telephone only, no matter how honest he may be.

There is an argument that a verbal contract is just as good as a written one. Whilst that is true, how are you going to prove you have a contract at all, if it is your word against his?

Take for example, a contract to rewire the a remote farmhouse. If you are the contractor and you drive 60 miles to arrive at the location only to find that the client has gone out for the day and not left a key, you will have wasted your transport time, petrol costs and will no doubt be very angry. With no contract, the client can simply say "we agreed the 21st, not the 22nd". You can do nothing about it. You have lost a day's work.

Of course the same applies if you are the client and have taken a day off work to be available for when the electrician calls.

That is a very small example, but the same applies in every element of our lives when we depend on some other person. The bottom line is that by using a written agreement, you are more likely to avoid such pitfalls in the first place and second, you will have a course of action to compensate you for your wasted time.

Now consider yourself in your business. Ensuring a well drawn contract is in place does not create mistrust. Nor does it have to be expensive, time consuming or complicated. Simply, it is the basis for trust. If all the terms are written down in one place, there is little room for misinterpretation. Whether you are the provider or the client, using a well drawn contract protects your valuable interests. It simply makes good business sense.

If you are apprehensive about asking a client to sign a contract, for fear that they will think you don't trust them, don't trust them! You simply have too much to lose by trusting them. A contract isn't a replacement for trust; it is the basis of trust.

In business, when you want to set up a contract you can either negotiate it, or you can set out its terms and say “take it or leave it”. If you own a shop, you use the latter. If an item is priced at £4.99, the seller is unlikely to accept £4.50, even on a day when sales are low. Nor can you say: “I will buy if you will deliver for me”. Most simple sale and purchase agreements for moveable goods are on fixed terms.

However, as soon as either the value of the goods or service is substantial or the agreement has features which are flexible, then the contract terms must be flexible too. If you buy a car, you can negotiate a price. The seller may hand you any contract he likes, but you will not accept it without looking for advantages in changing the terms. That usually results in a unique contract.

Of course, anyone in business prefers a standard contract on his chosen terms. In some industries it happens all the time. In some, the standard terms are amended to suit the buyer or seller and in all other cases, the contract is negotiated. So standard contract terms are best for the person whose terms they are. If you can get away with standard terms, it will always be to your advantage to do so. So when can you?

The most valuable transaction where standard terms are offered is a commercial lease. The landlord sends out a lease and givs the potential tenant no leeway. He has ten identical small units and he wants to be able to manage them along the same lines. Some tenants will accept his terms; others will not.

Then there are less expensive transactions where it is just not worthwhile negotiating.

On the Internet, it is far easier for a trader to insist on using his contract terms that for the same trader to enforce uniformity from his warehouse. So, the “package” of what I am prepared to offer to you for the price I ask you to pay has now become my “terms and conditions”. That expression has no special meaning in law. Only in common parlance does it mean “terms I will not negotiate or change”. Of course, the Internet is not an essential ingredient. It is simply easier to enforce fixed terms for a transaction via the Internet than face to face.

It follows that every Internet trader needs a “terms and conditions” document which governs how he will trade.

So what are the most important characteristics in your contract document? Obviously, it must reflect what you have for sale and how you expect that you and your counter-party will perform.

Additionally, both sides to the deal must understand what they have agreed. This is a point many solicitors miss. Long sentences, lack of punctuation, lists of the different versions of the same word, ancient word forms: all these serve no purpose other than to impress you that the lawyer knows more than you do. But he does not. So for a start, let’s use plain English, in clear, short sentences.

Providing a simple but professional agreement or terms and conditions document makes you look professional. It shows that you know what you are doing, that you are proud of it and that you stand by your word.

You can even use a little reverse psychology and tell your client that you use legal documents so that they have confidence that the job will be done on time, in a professional manner, with care and skill..

Finally, use a legal agreement simply because it will protect your business. It is highly likely that it took you a long time to get to where you are today. Don't risk falling behind and having a claim made against you by neglecting the basics. That brings me back to where I started: the contract does not undermine trust, it forms trust.

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